Market Turns Growth Into Value
S&P bumped these high-flying optical networking stocks from its S&P/Barra Growth Index to the S&P/Barra Value Index last night after the market closed. What does it mean? Quite simply, these stocks are no longer priced as aggressively as they once were, primarily due to concern that their growth rates are slowing. It also means they might now be considered bargains.
“Value investors have been shut out of telecom and technology stocks for some time,” said Diane Garnick, a derivatives strategist at Merrill Lynch & Co. Inc. (NYSE: MER). “And this move allows them to include them in their portfolios.”
Every June and December S&P re-evaluates each of the 500 companies listed in its main index by dividing their stock prices by the companies' book values, or corporate net worth. Companies with a lower ratio go into the S&P/Barra Value Index. And companies with a higher ratio are put into the S&P/Barra Growth Index. This gives investors handling high-growth and lower priced value funds more appropriate benchmarks to measure performance.
In the past, Agilent, JDSU, and Nortel all had been categorized as high-growth companies. But with JDSU’s stock plunging about 40 percent, Nortel sinking roughly 35 percent, and Agilent falling nearly 30 percent over the past year, Standard & Poor’s moved the companies from the growth index to the value index.
Don Luskin, CEO of MetaMarkets.com Inc. and an advisor to the Open Fund, a mutual fund, called the move "ironic" but added that he doesn’t think that it will have too much of an impact. “It doesn’t mean that these companies have finally made it,” he said. “And it doesn’t mean that they’ve fallen off Mount Olympus. It’s emblematic of what has been happening all year with tech stocks. Now, investors can finally look at these stocks without laughing at the prices.”
Lucent Technologies Inc. (NYSE: LU) and Qwest Communications International Corp. (NYSE:Q) joined 18 other companies moving from the growth to the value index.
Although Agilent, JDSU, and Nortel may have fallen hard from their highs, many believe there is still a long life ahead for them. “When you look at fundamentals, JDSU is probably a better bargain than Proctor & Gamble,” said Luskin.
The big question is just how far these stocks will fall before they start recovering.
“It depends,” said Luskin. “There is a buyer and seller at every transaction, and I’m sure each one views this differently. Conventional wisdom has been saying that these stocks are headed toward zero, and that’s just ridiculous. A year ago they were headed toward infinity.”
Nortel and Agilent spiked up in trading this morning, but dropped off slightly by afternoon. JDSU was also up in the morning and was down about 5 percent to $44 a share this afternoon. Lucent shares rallied slightly this morning, but were down 5 percent to $13 a share in the afternoon, while Qwest bobbed up and down all day, finishing up 2.5 percent at around $40.
-- Marguerite Reardon, senior editor, Light Reading, http://www.lightreading.com